Financial Services & Insurance: The Long March Insurance Information Institute December 2001 If you’d like a copy of this presentation, I will be happy to e-mail it to you Robert P. Hartwig, Ph.D. Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected]www.iii.org
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Financial Services & Insurance: The Long March
Insurance Information InstituteDecember 2001
If you’d like a copy of this presentation, I will be happy to e-mail it to you
Robert P. Hartwig, Ph.D. Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
• Your Bread & Butter: Investing, Estate & Retirement Planning
• The Economy
• Q&A
CONVERGENCE CREATES OPTIONS & OPPORTUNITIES FOR BANKS AND INSURERS
% Non-Life Insurers Planning to Widen Fin’l. Services Operations
17.2%
58.1%
8.6%4.5%
8.6%13.6%
28.3%
16.7%13.1%
26.3%
0%
10%
20%
30%
40%
50%
60%
70%
InsuranceServices
Insurance Alliances withBank/AssetManagers
Ownership ofBanks/AssetManagers
FinancialServices
Conglomerate
Today
2005
Source: EIU/Pricewaterhouse Coopers; December 2000.
Is moreConglomeration
in store?
Applications for Thrift Charters, by Industry
Telecom1%
Retail5%Insurance
53%
Trade Group5%
Mfg.8%
Misc.10%
SecuritiesBroker/Dealers
18%
January 1, 1997 – May 1, 2001 (220 Applications)
Source: Office of Thrift Supervision
World’s Largest Financial Services Firms, 2000
*EstimateSource: Fortune
$129.9
$111.8
$92.8
$71.2 $71.0
$0
$20
$40
$60
$80
$100
$120
$140
General Electric Citigroup AXA ING Group Allianz
$ Millions
Top 10 Bank Holding Companies (2000, $ Billions)
Source: Board of Governors of the Federal Reserve; Insurance Information Institute.
$953.4
$712.7$625.5
$289.8 $272.4 $245.9 $216.5 $202.1 $165.2 $164.7
$0
$250
$500
$750
$1,000 $ Billions
Number of Bank Holding Cos. Formed Since GLB, (by FRB District)*
*As of Aug. 10, 2001.; GLB signed into law Nov. 1999.Source: Board of Governors of the Federal Reserve; Insurance Information Institute.
13
44
26
49
29
85
68
4437
89
42 42
$0
$20
$40
$60
$80
$100
Dallas district holding companies have smallest asset base of all 12 districts!!
Financial Assets by Sector
1990 vs. 2000 ($Billions)
608
2,644
1,351
556
6,406 6,492
3,139
1,217880
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Mutual Funds* CommercialBanks
Life Insurers Securities Non-LifeInsurers
1990 2000
*Includes closed-end funds.Source: Federal Reserve, Insurance Information Institute
The Mating Dance
Wave of the Future?
Know Thy Enemy
Top 10 P/C Insurers: TX & US(2000)
Texas NWP US NWPState Farm $3,125.1 State Farm $33.3Allstate 1,997.8 Allstate 21.6Farmers 1,956.6 Zurich/Farmers 16.8AIG 817.5 AIG 12.2USAA 776.9 Berk. Hathaway 10.4Travelers 695.4 Travelers/Citi 9.9Progressive 532.6 Nationwide 9.5Continental 441.5 Liberty 8.7Liberty 403.8 C N A 8.1Hartford 401.9 Hartford 6.9
Top 10 Life/Health Insurance Groups & Cos., (2000, US Market)
*EstimateSource: Insurance Services Office, Insurance Information Institute.
$30.6
$24.0 $23.5 $23.0
$18.6 $18.2 $17.5 $17.0 $15.6 $14.4
$0
$5
$10
$15
$20
$25
$30
$35
Met
Life ING
AIG
Aegon
USA
Hartfo
rd L
ife
Nation
wide
CIGNA
Pruden
tial
Princip
al L
ife
New Y
ork L
ife
$ Billions
Top 10 Global Life Insurance Companies, (2000)
Source: Fortune, Insurance Information Institute.
$92.8
$71.2 $68.1$61.5
$53.3$46.4 $43.1
$38.1 $37.5$31.9
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100 $ Billions
Top 10 Writers of Annuities, 2000
*EstimateSource: Insurance Services Office, Insurance Information Institute.
$9.5
$7.1 $6.7 $6.5$5.9 $5.4 $5.3 $5.3 $4.9 $4.9
$0
$2
$4
$6
$8
$10
Hartfo
rd L
ife
Amer
ican G
ener
al
Citigr
oup
Aegon
USA
GE Fin
ancia
l
Met
Life
Nation
wide
TIAA G
roup
ING
Gro
up
Amer
ican E
xpre
ss
$ Billions
Top 10 Securities Firms’ Revenue (2000)
Source: Fortune, Insurance Information Institute.
$45.4 $44.9
$33.0
$26.4
$10.3$7.1
$2.8 $2.3 $2.0 $1.7$0
$10
$20
$30
$40
$50 $ Billions
Top 10 Mutual Fund Cos. (Assets, 2000)
Source: Investment Company Institute, Insurance Information Institute.
$818.8
$574.3
$368.5
$242.6$191.7 $177.0 $176.6 $172.2 $171.7 $166.0
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900 $ Billions
Why Bother Getting into Financial Services?
0%
5%
10%
15%
20%
25%
US P/C Insurers All US Industries LifeDiversified Finl. Comm. Banks
ROE: Financial Services Industry Segments, 1987–2000*
* 2000 figures are estimates.Source: Insurance Information Institute
-2%
0%
2%
4%
6%
8%
10%
12%
14%
P/C Life
Source: A.M. Best, Insurance Information Institute
Growth in Premiums Written: P/C vs. Life/Annuity
*2000 est.; 2001 forecast from III Groundhog Survey
Life Growth Outpaces P/C
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
ROE Non-Life Cost of Capital
ROE vs. Cost of Capital: US Non-Life 1991 – 2000
Source: The Geneva Association, Insurance Information Institute.
Ranks of the “Best of Breed” are Thin
1999 Return on Equity (Profitability)
1.0%
2.8%
3.1%
5.5%
6.5%
7.4%
15.4%
0% 5% 10% 15% 20%
Fortune 500
PP Auto
US All P/C Lines
Workers Comp
Homeowners
Comm Multi Peril
Comm Auto
Source: NAIC, Insurance Information Institute
1999
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
ROE Life Cost of Capital
ROE vs. Cost of Capital: US Life Insurance 1992 – 2000
Source: The Geneva Association, Insurance Information Institute.
Ranks of the “Best of Breed” are thin among stock life insurers too, though not quite so bad.
Competition—Still Intense: Number of Insurers: 1970-2000
1095 1059
15751702
2406 2430 2485 2480 2455
1802 17461958
2261 2195
17151563
0
500
1,000
1,500
2,000
2,500
3,000
1970 1975 1980 1985 1990 1995 1998 1999 2000
Property/Casualty
Life/Health
Sources: P/C: A.M. Best; L/H: NAIC.
Impact of Recession on P/C Premiums and Profitability (1970-1999)
8.1%
5.4%
-2.7%
0.2%
3.9% 3.8%2.7%
4.1%
8.8%
4.7%
7.0%
8.9%9.4%
11.3%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Inflation (CPI) NWP Growth(unadj.)
Real NWPGrowth
ROE--P/CInsurers*
ROE--AllIndustries*
ROE--Banks* ROE--DiversifiedFinancial*
Recession Years (1970; 74-75; 80-82; 90-91)
Non-Recession Years (all other years, 1970-1999)
*GAAP return on equity, adjusted for inflation; Bank data 1952-99; Div. Fin. 1987-99Source: Insurance Information Institute
Source: New York Times Magazine, August 12, 2001
Source: New York Times Magazine, August 12, 2001
Source: New York Daily News, September 10, 2001
Financial Services Reform: The Reality so Far
• GLB: Signed by President Clinton Nov. 12, 1999• M&As: Little activity between banks and insurers.
Overall M&A activity ($ & #) down significantlyPartnerships popular (Travelers/Citi model not followed)Acquisition of agencies somewhat popular
• Impediments:Low ROEs (esp. on P/C side, but also Life)Regulatory uncertainties (fed vs. state regulation; privacy)Extraordinary economic/financial uncertainty
• Organic Growth:Many insurers have formed banks Has appeal for banks and insurers (e.g. State Farm)
• No federal chartering of insurers—yet
What’s Hot?
Value of Shares Traded, 1990- 2000 ($ Trillions)
Source:Securities Industry Association, Insurance Information Institute
1.3
1.5
1.8 2.3
2.5 3.1 4.
1 5.8 7.
3 9.0
11.1
0.5
0.7
0.9 1.4
1.5 2.
4 3.3 4.
5 5.8
11.0
20.4
0
5
10
15
20
25
90 91 92 93 94 95 96 97 98 99 00
NYSE NASDAQ
Number of Mutual Funds, 1985- 2000*
*Total also includes hybrid and money market funds.Source: Investment Company Institute, Insurance Information Institute
5791,100
2,140
4,395
382 4041,046
2,2101,527
3,081
5,728
8,171
0
3,000
6,000
9,000
1985 1990 1995 2000
Equity Bond Total
Principal Categories of Revenue Growth for Life Insurers
13.6%
18.5%
23.6%
24.1%
48.1%
72.0%
0% 20% 40% 60% 80%
Indiv. Annuities
All Lines
Ordinary Life
Indiv. A&H
Group A&H
Group Life
G ro u p L i f e
Source: AM Best
Percent Change from 1995 - 2000
Fixed Annuity Sales, Distribution Channel (2000)
Source: LIMRA.
1995
Stockbrocker10.0%
Banks21.0%Direct Resp.
1.0%Other3.0%
Ind. Agents38.0%
Career Agents27.0%
2000
Stockbrocker6.0%
Banks29.0%
Direct Resp.1.0%Other
4.0%
Ind. Agents47.0%
Career Agents13.0%
Variable Annuity Sales, Distribution Channel (2000)
Source: LIMRA.
1995
Stockbrocker30.0%
Banks7.0%
Direct Resp.14.0%
Other5.0%
Ind. Agents12.0%
Career Agents32.0%
2000
Stockbrocker41.0%
Banks10.0%
Direct Resp.8.0%Other
5.0%
Ind. Agents11.0%
Career Agents25.0%
Annuities: Too Many Eggs in One Basket?
“C N A To Cut Staff 11%; Charges To Be Taken”
--Wall Street Journal, December 6, 2001
Will cut 1,850 jobs (600 at Chicago HQ)
Discontinue variable life and annuity business
Take charge up to $174 million (2/3 for restructuring)
Reduce number of offices from 169 to 68
What are the Banks Doing?
Bank Distribution Channels for P/C Insurance
4.3%
15.4%
17.4%
21.7%
27.7%
0% 5% 10% 15% 20% 25% 30%
Agents in Banks
Direct Mail
Telemarketing
Bank/platform empl
Securities/Inv Grp
Source: American Bankers Insurance Association, Insurance Information Institute
2000
1998 Bank Insurance Premiums
Other1%
Annuities$19.6 billion
63%
Life$1.5 billion
5%
Personal$2.9 billion
9%
Commercial$4.0 billion
13%
Credit$2.9 billion
9%
Total = $31.1 Billion
1999 Bank Insurance Premiums
Other$0.3 billion
1%
Indiv. Life$0.7 billion
2%
Annuities$24.2 billion
66%
Indiv. Health/Dis$1.1 billion
3%
Personal$3.1 billion
8%
Commercial$4.4 billion
12%
Credit$2.9 billion
8%
Total = $36.7 Billion
Source: American Bankers Insurance Association, Insurance Information Institute.